218
“A trifling debt makes a man your debtor; a large one makes him your enemy.”
Seneca
I. Teacher to Teacher Dialogue
Debtor’s prisons were holding cells for economic hostages whose ability to get out was
directly proportional to the debtor’s ability to get others to pay his debt for him. Many of those
dungeons became so crowded that the New World became a dumping ground for detainees. As
fate would have it, that migration was most fortuitous for our nation. Very often the same people
fail in spite of the best good faith efforts of their proprietors. That failure should not, in effect, act
as a life sentence in keeping that business or its proprietor from reentering the marketplace.
Bankruptcy is really one of the earliest forms of recycling, a recycling of economic opportunity
for good faith debtors who deserve a second chance.
who must draft bankruptcy statutes.
The recent history of federal reforms in the United States illustrates Congress’s attempts to
deal with the dilemma of trying to make the law more humane while trying to curb abuses. The
Bankruptcy Act of 1978 provided for sweeping reforms that sought to destigmatize bankruptcy in
an economy that had grown too dependent on credit. Unfortunately, with this liberalization came
BANKRUPTCY AND
REORGANIZATION
28
Bankruptcy and Reorganization
219
II. Chapter Objectives
Prevention and Consumer Protection Act of 2005.
2. Describe bankruptcy procedures and the provisions of a Chapter 7 liquidation bankruptcy.
3. Describe a Chapter 13 adjustment of debts of an individual with regular income bankruptcy.
III. Key Question Checklist
What are the various types of bankruptcy?
Assuming Chapter 7 liquidation is sought, what procedural steps apply?
IV. Text Materials
Introduction to Bankruptcy and Reorganization
Congress enacted the original Bankruptcy Act in 1978, and it has been amended several times to
reflect many changes. After a decade of lobbying by credit card companies and banks, Congress
Bankruptcy Law
Landmark Federal Law: Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
Types of Bankruptcy – The most common forms of bankruptcy filings are Chapter 7
Bankruptcy Courts – The bankruptcy courts are part of the federal court system, and one
Bankruptcy Procedure
Pre-Petition and Post-Petition Counseling – Individuals, filing for bankruptcy, must receive
Chapter 28
220
Filing a Bankruptcy Petition – Voluntary petitions can be filed by a debtor in the case of a
Schedules – Individual debtors must submit schedules upon filing a voluntary petition and these
Attorney Certification – An attorney who represents a client in bankruptcy, must certify the
Meeting of the Creditors – The court will call for a meeting of the creditors, during which the
Proof of Claim and Proof of Interest – A creditor must file a proof of claim stating the amount
meeting of the creditors.
Bankruptcy Trustee – A bankruptcy trustee must be appointed in Chapter 7, Chapter 12, and
called an automatic stay.
Discharge of Debts – When discharge is granted, the debtor is relieved of responsibility to pay
Case 28.1 Bankruptcy Discharge: Speedsportz v. Lieben
Facts: Lieben stole from her former boyfriend and his company.
not dischargeable in bankruptcy?
Decision: Yes, even though she filed for personal bankruptcy, Lieben may not have her debts,
being granted.
Bankruptcy and Reorganization
221
Bankruptcy Estate
of the estate.
Ethics: Fraudulent Transfer of Property Prior to Bankruptcy
The 2005 act gives the bankruptcy court the power to void certain fraudulent transfers of a
debtor’s property made by the debtor within two years prior to filing a petition for bankruptcy. To
Case 28.2 Bankruptcy Fraud: In Re Hoang
2012 Bankr. Lexis 4355 (2012), United States Bankruptcy Court for the District of Maryland
Facts: Hoang owned diamonds and tried to conceal them from a bankruptcy proceeding.
Decision: Yes.
Ethics Questions: She wanted to keep certain assets from her creditors. Yes, fraud associated
with a bankruptcy filing is a criminal act.
Exempt Property – Exempt property is property of the debtor that he or she can keep and that
State Exemptions – The Bankruptcy Code permits states to enact their own exemptions.
Homestead Exemptions – The federal Bankruptcy Code permits homeowners to claim a
Ethics: Limit on Abusive State Homestead Exemptions
wealthy debtors.
Chapter 7 – Liquidation
Chapter 28
222
debts under Chapter 7.
The 2005 Act’s Changes to Chapter 7 – The 2005 act established a new simple abuse rule and a
means test to determine whether a debtor should be granted relief under Chapter 7. If a debtor
Test 2: Means Test – The means test is a calculation that establishes, by law, a bright-line test to
determine whether the debtor has sufficient disposable income to pay prepetition debts out of
postpetition income. Generally, if a debtor has less than $7,025 in disposable income per year, he
Statutory Distribution of Property – If a debtor qualifies for a Chapter 7 liquidation
bankruptcy, the non-exempt property of the bankruptcy estate must be distributed to the debtor’s
secured and unsecured creditors pursuant to statutory priority established by the Bankruptcy
Chapter 7 Discharge – The major benefit of a Chapter 7 discharge is that it is granted quite soon
meeting of the creditors.
Contemporary Environment: Discharge of Student Loans in Bankruptcy
Student loans are non-dischargeable in bankruptcy.
Chapter 13 petitions are usually filed by individual debtors who do not qualify for Chapter 7
liquidation bankruptcy and by homeowners who want to protect nonexempt equity in their
Bankruptcy and Reorganization
223
Limitations on Who Can File for Chapter 13 – Only an individual with regular income alone
or with his or her spouse who owes individually or with his or her spouse (1) noncontingent,
before the case is closed.
Chapter 13 Plan of Payment – The debtor’s Chapter 13 plan of payment must be filed not later
than 90 days after the order for relief. The debtor must file information about his or her finances,
including a budget of estimated income and expenses during the period of the plan. The Chapter
creditors for acceptance.
Confirmation of a Chapter 13 Plan of Payment – The court can confirm a Chapter 13 plan of
payment if the prior requirements are met and if (1) the plan was proposed in good faith, (2) the
Chapter 13 Discharge – The court grants an order discharging the debtor from all unpaid
unsecured debts covered by the plan after all the payments required under the plan are completed.
A debtor cannot be granted Chapter 13 discharge if the debtor has received discharge under
Contemporary Environment: Discharge of Student Loans in Bankruptcy
Student loans are defined to include loans made by or guaranteed by governmental units, student
loans made by nongovernmental commercial institutions such as banks, as well as funds for
scholarships, benefits, or stipends granted by educational institutions. The Bankruptcy Code now
Chapter 11 – Reorganization
Chapter 11—Reorganization of the Bankruptcy Code provides a method for reorganizing a